Perspective - SDDco Group

January 3, 2019  |  Vol 4. Edition 1

Dear SDDco Clients and Colleagues: Our SDDco Perspective includes industry news, guidance, regulatory rule updates, deadlines, and other timely matters impacting brokers, advisors, fintech firms, taxpayers, investors, and their service professionals. The SDDco Perspective is made available on our website monthly at http://sddco.com/resources-newsletter.

FINANCIAL INDUSTRY & CRYPTOCURRENCY


Bryon Lyons
CEO, SDDco Brokerage Advisors LLC

SEC Reminds Two Robo-Advisors That Revolutionary Technology and Business Plans Do Not Change Need For Robust Adviser Act Compliance Program

On December 21, 2018, the Securities and Exchange Commission (“SEC”) announced, in a first-of-its-kind action against robo-advisers, that it instituted settled proceedings against Wealthfront Advisers LLC and Hedgeable Inc. for making false statements about investment products and publishing misleading advertising.

Wealthfront, one of the nation’s largest robo-advisers, was fined $250,000 for improperly implementing and supervising its Tax Loss Harvesting service and for improperly implementing its advertising compliance program. Hedgeable, which withdrew its investment adviser registration in September, was fined $80,000 for not properly presenting performance data and for falsely claiming its outperformance of competitors.  
SEC Press Release re Wealthfront, Hedgeable.12-21-2018
SEC Order Wealthfront.12-21-2018
SEC Order Hedgeable.12-21-2018
SEC Investor Bulletin: Robo-Advisers


SEC 2019 Exam Priorities and FINRA Investor Alert Eye Cryptocurrencies

On Thursday, December 20, 2018, the SEC Office of Compliance Inspections and Examinations (“OCIE”) announced its 2019 Examination Priorities, which include a focus by SEC examiners on digital asset market participants - whether broker dealers, investment advisers, or trading platforms. Where the products being offered, traded, or managed are securities, the SEC will examine for regulatory compliance. 

In a related posting by FINRA Staff on November 30, 2018, Storing and Securing Cryptocurrencies, FINRA continues its series of articles on the emerging world of digital assets exploring Initial Coin Offerings, digital tokens, the virtual currency regulatory landscape, and tips for investors and market participants alike to avoid fraud and scams.
SEC Office of Compliance Inspections Press Release.12-20-2018
2019 SEC Exam Priorities
FINRA Investor Alert - Cryptocurrencies

CYBERSECURITY


Erin Furtado
Head of Marketing

Internal Accounting Controls Must Account For Cyber-Related Threats 

Could you imagine an issuer getting “spoofed” by a phishing email, transferring wire funds to an unknown recipient, yet still, somehow, maintaining compliance with internal controls modeled after stringent SEC rules? While it seems unfathomable, it happened recently. After investigating, the SEC concluded that “issuers subject to the requirements of Section 13(b)(2)(B) must calibrate their internal accounting controls to the current risk environment.”  Read more >

SDDco CYBER
COMPLIANCE & SUPPORT OFFERING

  • Become compliant with all state and federal requirements including FINRA, NYDFS, SEC, etc.
  • Infrastructure Testing including Penetration Testing
  • Customized and Tested Policies and Procedures
  • Fully Managed Incident Response Coverage
  • Data Security Training
  • Vendor Due Diligence
  • Risk Assessments

Speak with an SDDco consultant about how we can help you navigate the nuances of armoring your firm through SDDco Cyber.

COMPLIANCE & REGULATORY


Gary Fox
Director

FINRA Focuses On Reasonable Due Diligence In Its 2018 Report On Examination Findings

On December 7, 2018, as part of its 2018 Report on Examination Findings, FINRA released specific guidance on “Reasonable Due Diligence” for private placements. Among other items, FINRA stated that firms that performed reasonable diligence typically evidenced review in the four following areas.

  1. Conducted meaningful, independent research on material aspects of the offering; identified any red flags with the offering or the issuer; and addressed and resolved concerns that would be relevant to a potential investor
  2. Formally designated one or more qualified persons (at smaller firms) and charged them with investigating and determining whether to approve the offering for sale to investors
  3. As part of their process, firms independently verified information that was key to the performance of the offering
  4. After the offering, firms conducted ongoing diligence to ascertain whether offering proceeds were used in a manner consistent with the offering memorandum, particularly when the firms engaged in ongoing sales of an offering after initial closing.  Read more > 


Ross Marlin
Associate Director

FINRA Publishes 2018 Report on Examination Findings

On December 7, 2018, FINRA published its 2018 Report on FINRA Examination Findings, its second annual report detailing observations from its recent examinations of broker-dealers.  The report cites problematic practices relating to, among other things, suitability reviews for retail customers, fixed income mark-up disclosure, and due diligence for private placements.  Read more >  


To learn more about how SDDco can help bolster your firm’s compliance program, click here.

ACCOUNTING & TAX


Bob Fortino
Managing Partner

FINRA Outlines Accuracy Of Net Capital Computations In Their 2018 Report On Examination Findings

On December 7, 2018, in its 2018 Report on Examination Findings, FINRA outlined how firms should maintain their net capital levels, by highlighting the below points. Additionally, FINRA stated that some firms have faced challenges in complying with this rule and related guidance from the SEC staff.

  1. Insufficient Documentation Regarding Expense-Sharing Agreements – Some firms did not maintain sufficient documentation to substantiate their methodology for allocating specific broker-dealer costs to the firm or an affiliate. Other firms’ expense-sharing agreements have not clearly set forth a method of allocation for payment of certain expenses by the firm as opposed to a third party.
  2. Incorrect Inventory Haircuts – Some smaller firms did not adequately design or document policies and procedures for assessing and monitoring the creditworthiness of certain securities or money market instruments to determine whether these products have a “minimal amount of credit risk”.
  3. Inaccurate Operational Charges – Some firms miscalculated their operational charges due to misinterpretations of the Net Capital Rule, e.g., by failing to take appropriate haircuts in non-purpose equity securities borrowed transactions or in certain underwritings. Further, in some instances, firms encountered challenges with calculating operational changes—e.g., suspense or aged fail charges—as a result of human error and limited spreadsheet controls.  Read more >

LEGAL


Casey Muller
Director of Legal & Internal Compliance

When It Comes To Securities Fraud, When Does “Ignorance Of Fact” Excuse Culpability?

Here’s a hypothetical: Should a securities adviser be liable for sharing false statements with potential investors, if such statements were originally made by a direct supervisor? The Supreme Court is set to review this exact scenario in Lorenzo v. SEC. In the process, SCOTUS is expected to examine the scope of the Janus (2011) decision, which held that only the “maker” of a statement is liable for its falsity, while also determining whether the SEC properly imposed liability on Lorenzo for participating in his supervisor’s “scheme” Read more >

IN THE SPOTLIGHT

Keep a look out for us at 2019 LINC:

TD AMERITRADE INSITUTIONAL CONFERENCE
AFFINITY COMMUNITY EXHIBIT AREA (2nd Floor) - Booth H4

San Diego, CA | February 6-8, 2019

http://tdaconferences.com/

Grand Hyatt
1 Market Place
San Diego, CA, 92101
Tel: 619-232-1234

https://www.hyatt.com/en-US/hotel/california/manchester-grand-hyatt-san-diego/sanrs

SDDco Group makes this general information available for educational purposes only, the contents of which were not originated from SDDco. SDDco is not affiliated with any of the publishing persons or entities of the articles herein. The information provided should not be construed as legal advice. This email may constitute an advertisement under U.S. law.

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